Investment Outlook 2023
Stock markets and investment funds endured a torrid 2022. Chris Sparks reviews what top investment managers expect for 2023
Global equities suffered just their second negative year over the last decade in 2022. Rising central bank interest rates were mostly to blame, along with inflation, which depresses consumer and business spending and impacts on corporate growth and profits. For 2023, stock markets will pivot on perceptions of peak inflation and peak interest rates, according to David Warren, chief investment officer at
Zurich Life.
In Warren’s view, equities are now fairly valued versus the last decade on both a lagging and leading basis. “As ever, the level and trajectory of future earnings is a key consideration, with the rate of economic growth and cost pressures key determinants,” he adds.
In Zurich’s 2023 investment outlook, Warren says the prevailing market consensus is that inflation has peaked, and that rates will therefore peak by the middle of 2023. Attention will now shift to the consequences of these higher rates and the impact that may be felt in relation to economic growth.
“We shouldn’t let the negative markets of last year dominate our outlook for the coming year,” says Warren. “Humility should help us draw the lessons from 2022 but we need to avoid looking backwards too much or positioning ourselves for last year’s markets. Medium-term inflation expectations have remained contained despite the unanticipated surge in current inflation. Those expectations have risen but they are still broadly consistent with medium-term price stability.”
Zurich is “broadly constructive” on the medium-term outlook for risk assets once medium-term inflation expectations remain consistent with price stability. However, even if reported inflation is below the current consensus expectation in the coming months, Warren believes that central banks will be cautious in calling the pivot in interest rate policy.
“They would prefer to burnish their inflation credibility further rather than reacting quickly to near-term inflation data,” says Warren, adding that while equity markets can likely absorb a certain amount of earnings disappointments, a deeper recession is not yet priced into stock markets.
Jordi Basco Carrera, lead investment strategist at Allianz, believes capital markets will remain capricious, as the timing and severity of the expected recession, and its implications on policy, remain uncertain. Carrera’s view is that current equity valuations suggest that markets still do not fully price in the expected balance sheet erosion of companies as demand falters.
“It is too early to call for an equity market trough and we believe that it is possible to see another sizeable market correction in the short-run, should markets readjust for a more aggressive policy path or for a deeper recession,” says Carrera. He notes the correction in equity markets in 2022 was driven by valuation effects i.e. reduction in price-earnings multiples rather than earnings. “With earnings expectations trending downward in 2023, there is still material downside risk for equity valuations at current levels,” he says.
Carrera also expects that central banks’ quantitative tightening will reduce money supply, and this will negatively impact on risk appetite in the next six to nine months. “Once the hawkish tilt is reverted in H2 2023, markets should start feeling a timid re-acceleration of money growth, adding tailwinds for risky assets by pushing valuations higher,” he adds
A‘We encourage clients to stay invested, as the best days in the markets often quickly follow the worst’
XA investment strategist Emmanuel Makonga concurs that consensus earnings-pershare growth expectations seem too optimistic, given that the outlook for economic growth in developed markets through 2023 is c.0%. “We believe the market correction is not yet complete, and the onset of further macroeconomic decline could be the trigger for a deeper stock market decline,” Makonga cautions.
Wei Li, global chief investment strategist at fund manager BlackRock, is also of the view that equity valuations don’t yet reflect the damage ahead. “Earnings expectations don’t yet price in even a mild recession,” says Li . “For that reason, we stay underweight equities on a tactical horizon for now. Yet we stand ready to turn more positive as valuations get closer to reflecting the economic damage, as opposed to risk assets just responding to hopes of a soft landing.”
BNY Mellon doesn’t expect stocks to bottom until the market prices in a recession and Wall Street’s consensus 2023 earnings per share estimate falls further. “Although it is unlikely the market will have a V-shaped recovery
given the prospect of higher rates and inflation continuing in the coming years, we do expect returns to be positive in 2023,” says Catherine Keating, CEO of the wealth management unit.
“Timing the bottom of the market is extremely challenging. We encourage clients to stay invested, as the best days in the markets often quickly follow the worst, and we saw this play out in 2022 during several bear market rallies. Investors should remember that markets are forwardlooking and anticipate changes in the real economy, roughly 6-12 months ahead of when they appear in economic data. While the market is unlikely to bottom before the recession starts, it can rally before the data turn uniformly positive,” Keating adds.
At investment manager Apollo, chief economist Torsten Sløk observes that while price inflation for goods has fallen sharply in recent months, inflation in the service sector remains on the rise. “That presents a challenge for policymakers, as services sector inflation is notoriously difficult to cool down, and would seem especially hard to do so at this particular moment,” says Sløk.
“Capital markets will remain vulnerable in 2023 and volatility will likely persist because with inflation at high levels and the Fed keeping rates elevated, capital will remain scarce and expensive.”
The higher-rates-for-longer theme triggered a significant derating of equities in 2022, notes Philipp Lisibach head of global investment strategy at Credit Suisse. In his opinion, this theme will likely continue to dominate during the first half of 2023, leading to muted equity performance.
“Against this backdrop, our economists forecast a recession in the eurozone, the UK and Canada, alongside very weak growth in the US,” Lisibach adds. “This will inevitably add downside risks to corporate earnings, even more so given rising costs.
“Consensus earnings have already been revised materially lower, but the current estimate of 3.7% growth for 2023 may still be too optimistic. Ultimately, earnings resilience will depend heavily on the length and magnitude of the economic slowdown, but we see rising risks of negative earnings growth in 2023.”
Christian Nolting, global CIO at Deutsche Bank, is more optimistic than many of his peers. For the full year 2023, he believes nominal company profits will match their prior-year levels and will not fall as they did in previous recessions.
Nolting argues: “The basis for this assumption is the nominal growth of gross domestic product. For the full year, increases of 5% in the U.S. and as much as 6-7% in Europe are considered possible. For the stock markets, this could mean that the revaluation following the recent large interest rate hikes have now more or less ended.
“A high valuation phase due to very low interest rates has been followed by a low valuation phase, and we are currently transitioning to a medium valuation phase for the years ahead.
While this is no indication that 2023 will be a great year for stocks, we do expect solid price increases in the single-digit percentage range.”
Nolting cautions that shortterm and even substantial price fluctuations could occur at any time during 2023 given investor caution, analysts’ continued over-estimation of profits, and the many political and economic risk factors. “Market participants may continue to react strongly, even to less significant news,” he adds. Gaurav Mallik, chief investment strategist at State Street, also believes that equities will begin to sustainably recover in 2023. “At their current levels we do not see a lot of potential downsides in equity markets, as we believe that most bad news has already been priced in,” says Mallik.
“It is a difficult time for equity investors, but challenges always represent opportunities. Investors would do well to be prepared for a market pivot during 2023, and severely depressed equity valuations suggest that value stocks will outperform when sentiment lifts, especially in Europe. Patience is a virtue that the markets reward.”
Carsten Brzeski, chief economist at ING, believes Fed and ECB rates will peak in Q1. “We expect the ECB to bring the deposit rate to a maximum of 2.5% in Q1 2023. Reducing the ECB’s bond portfolio could become the ECB’s main policy instrument to fight inflation,” he says.
In the longer term, Brzeski contends, structural shifts in the global economy are likely to push up costs and hence inflation. He sees restructuring of supply chains, new trade barriers, and net zero commitments as pushing up corporate costs for energy and commodities, leading to more volatile inflation over the coming years.
TAX BURDEN
Government revenue from Corporation Tax topped revenue from Value Added Tax for the first time in 2022. End year Exchequer data shows that the tax burden on Ireland’s economy increased by 22% last year to €83bn. Corporation tax receipts amounted to €22.6bn, nearly 50% higher than a year earlier. Income tax receipts increased by 15% year-onyear to €30.7bn. Overall, the government hauled in €5bn more from taxpayers than it spent in 2022.
DEBT COST
Ireland’s debt management agency the NTMA has borrowed €3.5bn through the syndicated sale of a 20-year bond maturing in October 2043. The cost o the borrowing is 3.1% per annum. In January 2022, NTMA borrowing yielded 0.39% annually to lenders.
DUBLIN OFFICES
Office space take-up in Dublin totalled 206,000 sq. m. in 2022, up 35% on 2021, according to CBRE. Director Colin Richardson said the onus on organisations to meet ESG objectives could act as a catalyst for leasing activity in the coming year.
OUTPUT SURGE
Industrial production in manufacturing industries surged in the September to November 2022 period, according to CSO data. On an annual basis, factory output was 40% greater than in the corresponding period of 2021 and was 14% ahead of the previous three-month period.
INSOLVENCY COST
PwC research estimates that there was €1.8bn of debt owing from businesses that failed in 2022, with the average debt per SME of c.€2m. On PwC’s tally, the largest ten company failures comprised over 50% (debt of c€900m) of the total direct economic impact of all the business failures. Current insolvency levels are still well below pre-pandemic levels, and running at just 18% of the peak rate in 2012.
M&A DEALS
Public affairs consultancy Hume Brophy has been acquired by Penta, a multinational peer controlled by Falfurrias Capital Partners in North Carolina. Founded in 2005 by John Hume and Eoin Brophy, Hume Brophy has offices in London, Brussels, Dublin, Frankfurt, Paris, Hong Kong, and Singapore.
Danish logistic giant DFDS has followed up on its September 2022 acquisition of Lucey Transport Logistics in Cork with the £138m purchase of McBurney Transport Group in Ballymena. McBurney annually transports over 100,000 trailers across the Irish Sea.
Middleby Corporation in Illinois has acquired Dublin firm Marco Beverage Systems,
which designs and makes beverage dispensers. Marco also has a facility in Ningbo, China, and Middleby said Marco has annual turnover of c.€28m.
PIB Group has acquired McGivern Insurance Brokers
through its subsidiary Campion Insurance, which leads PIB’s Irish division. McGivern Insurance is a commercial broker founded in 1982 by Hugh
McGivern. In the same sector, US company Gallagher has acquired broker First Ireland, which has been trading since 1982 and has 35,000 customers.
Infrastructure investor John Laing, owned by US private equity giant KKR, has acquired Convention Centre Dublin and a number of other assets from the Irish Infrastructure Fund. As well as CCD, John Laing is acquiring Towercom, Ireland’s largest telecom tower company, and Valley Healthcare, Ireland’s largest primary care centre operator.
Gradguide, a career events, mentorship and graduate recruitment platform, has been acquired by UK peer Native. Founded by CEO Mark Hughes in 2019, Gradguide received investment from Taxback entrepreneur Terry Clune.
IT, security and telecoms firm HCS has acquired Fixaphone, also based in Waterford. Fixaphone specialises in onpremise PBX phone systems and has c.750 customers, while HCS offers IP telecoms solutions.
Bevcraft Group has completed a merger transaction with Heidrun Tapperi, the leading mobile canning business in Norway. The transaction is an all-share equity swap.
CITI MOVE
Ronan Group Real Estate has agreed a two-part deal with Citi that will see the development of Citi’s new European bank headquarters at Waterfront South Central (WSC) in Dublin’s North Docklands. From 2026, Citi will occupy c.300,000 sq. ft or 60% of the commercial office space of the WSC scheme. RGRE is acquiring Citi’s current office and will redevelop it with funding from Landfair.
HANLEY DIVIDENDS
Hanley Energy has announced 225 new jobs for a new manufacturing facility in Monaghan and expansion of its existing site in Dundalk. Enterprise Ireland is providing taxpayer-funded state aid towards the employment expansion. In 2020 and 2021, Hanley Energy Ltd paid €15m in dividends to its parent company Nordmore Holdings Ltd, which also accounts for Hanley group subsidiaries in the USA, Germany and South Africa.
AIRPORT CHARGES
New passenger charges for Dublin Airport set by the Commission for Aviation Regulation have been criticised by both the airport operator and Ryanair, the airport’s largest customer. CAR estimates the revised price cap will allow the airport to collect €1.4bn in airport charges over a four-year period, as charges to airlines increase by up to 45% out to 2026.
FUNDING ROUNDS
Zeus Scooters has raised €650,000 equity funding from EIIS investors. The Carlow firm, led by Damian Young, says it has c.5,000 threewheeled e-scooters deployed in Germany, Norway, Sweden, Croatia, Italy and Malaysia.
HR Duo in Dunshaughlin has received €3m investment from Puma Venture Trust in London and €750,000 from Pershing Nominees in Liverpool. The €4.5m Series A funding round also included c.€825,000 investment from a number of individual investors. Led by Jerome Ford, HR Duo automates multiple HR processes for medium-sized SMEs.
KUNA AXED
Croatia has adopted the euro as its currency, bringing the total number of countries in the single currency to 20, with a combined population of 347 million.
QUANTUM SECURITY
The government and the EU are committing €10m in a new initiative which aims to protect the transmission of sensitive data and prevent cyberattacks. The Quantum Communications Infrastructure network will be deployed over the next two years by enhancing ESB Telecoms’ optical fibre network with an additional layer of security, based on quantum physics, in particular quantum key distribution.
MARITIME CONSENTS
Environment minister Eamon Ryan has issued Maritime Area Consents (MACs) to the first phase of seven offshore renewable energy projects. The award of MACs enables the projects to begin their pre-planning application engagement with Bord Pleanála and to participate in the first auction for offshore wind under the Renewable Electricity Support Scheme.
GREEN MESSAGING
Green Party ministers Catherine Martin and Eamon Ryan have allocated €5m from their departments to fund 25 radio and TV projects to raise awareness of climate change and climate action. Martin said the funding will aim to highlight climate change impacts and what people can do to reverse its effects. The propaganda funding is limited to the AV sector and excludes online and print media.
WIREFOX OFFICE
Belfast investment and development company Wirefox has acquired 35-47 Donegall Place in Belfast city centre. The former bank building, known as 35DP, is a five-storey retail and Grade A office space adjacent to City Hall.